Halpern sees no systemic problem, but a bad hedge could cost some shops more capital
As more mortgage brokers are adding non-qualified mortgage (non-QM) to their portfolios, they’re finding more non-QM lenders appearing in the space.
Some brokers who are in the space are finding pricing competitive with, or in some cases beating, conventional mortgage pricing. Others are moving into non-QM products to find solutions as new Fannie and Freddie condo rules have pushed more financing outside of agency loans.
For smaller lenders, a crowded field leaves less room for error. For brokers deciding where to send a file, it means more choices and more to vet.
One mortgage executive said he expects even more lenders to add non-QM products to their offerings.
Marc Halpern (pictured top), CEO of Foundation Mortgage Corporation, a non-QM lender, said the field has changed quickly. He believes the overall non-QM picture is healthy, even if smaller lenders might have a little less margin for error than the large companies in the sector.
"From what I'm hearing, even if you have some of these smaller shops, they're not the ones that are going to have a couple hundred million dollars on their lines," Halpern told Mortgage Professional America. "So even if they make an underwriting mistake, I don't see any systemic issues at this time. I'm not hearing of any systemic issues. The capital is there. The capital is still in the secondary market, and there's more money than deals. That goes all the way from non-QM into fix and flip and even private money."
A rapidly expanding sector
The Mortgage Bankers Association (MBA) reported Wednesday that the average contract rate on a 30-year fixed-rate conforming mortgage was 7.49%. Halpern said submissions at his company dipped for a couple of days as rates climbed, then recovered.
"People are still going to need money," he said. "They're still going to buy houses. They're going to need refinances. They're coming out of private money. It's just less deals. There are more people getting into non-QM. So it's sort of just a reset."
The changes to the condo rules have presented an opportunity for more non-QM loans, but they’re not the only factor leading to more lenders getting into the space.
"I think every mortgage company at this point, because the market share only continues to go up, I think because of Fannie Mae's new condo guidelines, you have to have a non-warrantable option," he said. "That's out there in non-QM. So you have to be in this space."
That gives brokers more places to send a non-warrantable condo file. However, smaller companies have to be more mindful of the risks they’re taking, as a mistake on one large file could be harder for them to overcome than for larger lenders.
"As you start to go down the list, there are companies that can't afford to make mistakes on $3 million loans," he said. "Or not that many of them. And then they'll be out of business."
‘Top of the cycle’
Halpern said the recent swings in rates have hit some non-QM lenders harder than others.
"There are certainly some people out there whose model in certain non-QM is to bulk up loans, and they got it handed to them," he said. "Market moves, some were hedged, and others were not hedged."
He has not heard of any that went out of business, though some took heavy losses.
"If you're bulking and let's say you just lost $15 million on a trade of $300, $400 million, how many of those trades have you had in the last 24 months where you made $15, $20 million?" he said.
Halpern had also heard, though not firsthand, about a mortgage bank left unhedged on a couple hundred million dollars in loans when the market moved.
"My first thought is, okay, well, that'll be good because maybe it puts someone out of business, maybe there's more business that comes," he said. "Then I thought about it, and that's not necessarily a good thing because ultimately who has a problem? It's the warehouse banks. If the warehouse banks have a problem right now, they're going to be looking at our haircuts, right? So it goes from anywhere from 100 to 95."
While there are challenges in the market right now, an industry veteran like Halpern keeps it all in perspective.
"Let's not forget, there are cycles,” he said. “You're at the top of the cycle. We spent a long time at the bottom of the cycle, a good part of 20 years. It's like you're waking up with a hangover. It doesn't feel so good. But you had a pretty good run."
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